Car Loan Interest Deduction

Under the old rules, car-loan interest wasn't deductible at all for personal vehicle purchases. Starting in 2025 and continuing into 2026, the new OBBBA law introduced a temporary deduction that lets eligible buyers deduct up to $10,000 per year of interest on qualified auto loans.

Car Loan Interest - Changes and things to lookout for.

Before 2025 car-loan interest wasn't deductible. but starting in 2025-2026 you can now deduct interest on qualifying new U.S.-assembled vehicles.

Pre-2025

What it was like for personal-use vehicles before 2025:

Before this change, auto-loan interest was not deductible for most personal car loans. Historically, the U.S. tax code did not allow a deduction for interest on personal vehicle loans. - No broad "car-loan interest deduction" existed for typical consumers.
Therefore, interest paid on standard auto loan was simply part of the cost of owning the car: it did not reduce taxable income in any direct or widespread way.

Now

What's new now for personal-use vehicles 2025-2026:

The one Big Beautiful Bill Act (OBBBA), signed in July 2025, created a new deduction for interest paid on qualifying auto loans.
From 2025-2028, taxpayers can deduct up to $10,000 per year in eligible auto-loan interest.
The deduction is taken above the line, reducing AGI without needing to itemize.
To qualify, the loan must start after December 31, 2024, and the car must be new, used for personal purposes, and assembled in the U.S.
Income limits apply, the deduction begins to phase out at $100,000 of MAGI for single filers and disappears at $15,000, with higher thresholds for joint filers.

Limitations

What to watch out for and limitations personal-use vehicles:

Vehicle eligibility: Only new cars qualify; used vehicles are excluded. The car must be assembled in the U.S. and used for personal purposes. Commercial vehicles or imported cars do not qualify.
Loan timing: The deduction applies only to loans originated after December 31, 2024. Refinanced loans may not qualify only if the original loan meets the criteria.
Income limits / phase-outs: For single filers, the deduction begins to phase out at $100,000 MAGI and is eliminated at $150,000 MAGI. Married joint filers have higher thresholds. High earners may see little to no benefit.
Deduction cap: The maximum deduction is $10,000 per year, regardless of how large the loan is. Large auto loans may not allow you to deduct all interest paid.
Temporary provision: The deduction is currently valid only for 2025-2028, so it is not permanent. Planning purchases around this window matters.
Non-qualifying payments: Only interest is deductible. Loan principal payments, fees, or other charges do not qualify.
Leases: Lease payments are not eligible for this deduction; it applies strictly to financed purchases.
Reporting and documentation: You need proper documentation of the loan and interest paid. The IRS may require proof that the vehicle meets the "new and U.S.-assembled' criteria.

Business Vehicles - What to look out for

As of 2026, the new auto-loan interest deduction under OBBBA only helps with personal-use, new, U-S assembled vehicles - it does not extend to vehicles used strictly for business.

Business Use

What OBBBA Does for business vehicles:

The OBBBA provides an above-the-line deduction for auto- loan interest on eligible vehicles, but it only applies to personal-use vehicles - not business or commercial vehicles.
Since business vehicles are excluded from this deduction, there's no change for vehicles used for business purposes; the $10,000 annual cap does not apply to them.

Now

What remains in place for business / mixed-use vehicles:

If a vehicle is used for business, such as for self-employment, a small business, or a business asset-auto-loan interest may still be deductible under existing business-expense rules. This has always been allowed and remains unchanged under the new law.
For vehicles used both for business and personal purposes (mixed use), interest must be allocated according to usage (e.g. using mileage logs).
This allocation determines what portion qualifies as a business deduction and what portion - if eligible, could qualify for the new personal-use auto loan interest deduction.

Limitations

Limitations / What to watch for:

The new deduction does not cover vehicles used for business or commercial purposes, so you cannot claim the $10,000 auto-loan interest deduction for any car classified as a business asset.
If a vehicle is used partly for business and partly for personal purposes, the interest must be allocated between the two uses. You cannot claim the same interest for both. The personal-use portion must still meet all other eligibility requirements, including being a new, U.S.-assembled vehicle with a loan originated after 2024
Proper documentation is essential for mixed-use vehicles. Keep mileage records, loan statements, proof of U.S. final assembly (e.g., VIN information) to substantiate any claim under the personal-use deduction.